Sveriges Riksbank raises rates again; Svensson dissents again

Yesterday, Sveriges Riksbank (central bank of Sweden) announced that it raised the main policy rate to 1.5%. This is the fifth consecutive 25 basis point increase since last summer. It also marks the twelfth time in a row that Executive Board Member, and Deputy Governor of the Bank, Lars Svensson dissents by voting for a looser stance (in this case he advocated an unchanged rate). The last time he agreed with an interest rate decision was in February 2009. The Inflation-Targeting Riksbank makes all this information publicly available on their web site (see the voting records here).

This high degree of transparency is not uncommon among inflation targeting central banks, and it is a pleasure to witness such public acknowledgment of the difficulties faced by policymakers. Some would probably argue that an image of a united board is what it takes to be a credible central bank (just think about all the fuzz the press could create from Axel Weber’s criticisms of the ECB’s bond purchasing programme). I don’t think so. The press in the inflation-targeting countries appears perfectly capable of understanding what is going on, and the transparency about policy deliberations makes the public aware that there is not one single truth out there.

Moreover, a couple of weeks after the decisions, the detailed minutes of the Executive Board’s policy meeting are published. These are interesting reads for policymakers and academics, and the minutes from the recent meetings demonstrate the productive atmosphere during the policy deliberations (given, of course, that the wordings haven’t been changed too much). So even though the public learns that Board members may disagree (big surprise), it learns that one has to come up with solid arguments for one’s position.

It is, of course, particularly intriguing for a monetary economist to follow Svensson when he presents his arguments against an interest rate increase. They are disarmingly simple and points to the fact that the staff forecasts conditional on an unchanged interest rate, point to CPI inflation being below the 2% target, and unemployment being above any sober guess of the natural rate. Not a situation in which a simple textbook exercise would call for an interest rate increase. Therefore, Svensson (and at the last meetings also Board member Karolina Ekholm) has voted for an unchanged interest rate, envisioning a gradual increase over the next couple of years. The interest rate increases actually implemented, were projected to entail steeper interest rate paths, which according to Svensson would lead to a too large appreciation of the Krona.

Prior to yesterday’s meeting, new data have pointed to more inflationary pressure building up (mostly from external sources, which may question whether CPI is the appropriate goal variable, but that is another story), and that some sectors are beginning to report labor shortages. But the CPI projection at an unchanged rate are still not above the inflation target, so I would imagine that Svensson’s arguments for yet another dissenting position are more or less unchanged. We must, however, wait a few weeks before we can see the precise reasons when the minutes are published.

A minor comment: CPI-inflation is in fact above the 2% target for the entire projection period. As I understand, Svensson’s argument goes that CPIF-inflation (which fixes the mortgage rate) is below 2% in the forecast.

It definitely has merits to look a CPIF rather than CPI. But the focus on CPIF is complicated by the fact that the Riksbank’s official target is CPI – not CPIF.